Given the press that leverage/debt has had over the past 18-months should interest payments be tax deductible?
Go back to the Dave Ramsey forum. Yes they should be deductible.
Would you mind elaborating on that a bit? Thanks.
I work in real estate. I definitely don’t think RESIDENTIAL real estate interest should be tax deductible. It’s totally and utterly arbirtrary and is counter to the federal gov’t’s drive toward affordable housing, as are the GSEs and FHA. ALL or most consumer interest used to be tax deductible, but that was done away with, leaving basically residential real estate as the last interest tax deduction for non-business-related expenses. Up until 9 days ago, I worked for one of the GSEs (I’ve moved on to work at a private bank doing real estate). In the fall of 2008, I made 3 observations to my colleagues: 1) The GSEs and FHA actually serve no purpose. Their purpose is to promote affordable housing by increasing liquidity into the markets. They were successful at increasing liquidity, but because of the huge amount of liquidity created and the absurd leverage requirements (it was 2.5% down, now 3.5%) of FHA loans, home prices nationwide became totally unaffordable for many home buyers, encouraging mass fraud and bubble like activity, inevitably bankrupting many people and making the poor even poorer. 2) Gov’t intervention to prevent a housing collapse (including homebuyer tax credits) will work counter to the federal gov’t’s long-standing mission of accomplishing affordable home ownership in the United States because it will prevent prices from falling to earth. If home prices remain inflated 1) another bubble and collapse is inevitable and 2) Many Americans will continue to be priced out of the market. Anyone who currently follows the real estate market can already see the single-family real estate engine reigniting nationwide. It’s actually a sad site to see. NOTHING has been learned and nothing has been accomplished because of this collapse. Interest rates are still low, liquidity for most minimally competent people is still very available, and prices are again swinging higher. Not a goddamn thing accomplished. 3) The interest tax deduction actually inflates home prices. At 6% interest, $4,000 in annual tax savings increases leverage on a home by more than $66,000, which is priced implicitly into the purchase price of homes. When I asserted this to my colleagues, I was stunned at the reaction–virtual silence. Because they had never heard anyone criticize government’s role in creating this mess. They were so convinced that their job (and mine) was honorable that they bought into their own hype and had never so much as challenged the conventional wisdom. I’m wrong half the time, but on this issue, I am so right that it makes me physically ill to see what’s going on in the markets.
The government uses the tax code to provide incentives or punishments for various activities. It was philosophically believed (right or wrong) that home ownership was good for society (marital deduction is another example). Making interest tax deductible was an incentive to make homes easier to afford, therefore, benefiting society as a whole. As far as the debt goes, I really don’t think the tax deductibility of the interest payments was the problem. It was the fact that liar loans were being given at 100% of the home value to an individual with no ability to pay. All of this was possible because it could be shifted off the original lenders balance sheet. It was nothing but a risk issue. Personally, I would rather not have the government make any of these judgments, but that is a total pipe dream.
I didn’t say the tax deduction was the reason for the bubble, but it is one of a multitude of reasons that home prices will continue to inflate and persist as unaffordable for a lot of Americans, including homeowners.
kkent Wrote: ------------------------------------------------------- > I didn’t say the tax deduction was the reason for > the bubble, but it is one of a multitude of > reasons that home prices will continue to inflate > and persist as unaffordable for a lot of > Americans, including homeowners. Hey kkent. My post was in response to the OP. I wasn’t trying to take anything away from your response.
We don’t have interest deduction on resi in the UK, but still managed to bubble up - but agree with kkent that there shouldn’t be any deduction, unless they also want to make rent tax deductible. I’d like to see interest made non-tax deductible as it would do away with all that modigliani miller nonsense once and for all - and just about every tax avoidance scheme involves debt and an offshore holding company. However it would need to be implemented world wide or risk hampering international capital flows. Non-US residents don’t buy munis for precisely this reason - they are only tax free in the US. So if one country did move the tax burden on interest from the holder of the debt to the payer of the debt they would likely suffer as entities taxable elsewhere stopped funding them.
I thought we were talking about interest on corporate debt. On residential, I think its worth noting that the interest deduction only exceeds the standard deduction for a few years for most home buyers, so it has a nice ramp up effect for people looking to buy their first house. Aside from this phenomenon, its probably not critical. In a non-residential mortgage context, the picture is a little clearer. Deductible expenses are charges which prevent pure sales cash from flowing straight to the owner’s net worth (shareholder equity). Interest clearly fits this description. Of course, even this description is subject to various exceptions.
I think they should stay deductible. I am sorry, but not everyone can handle owning their own house. It takes responsibility accountability for actions, something may in this world seems to be missing. The first reaction to anything that bad happens is always to point the finger at someone or something else. They should instead learn from their mistakes and experiences, (ie wisdom). Interest deductible housing loans is one of few advantages left for the lower upper class ($100K-$300K/yr). Yes, I do agree with Kkent’s claims of the GSE and FHA and the fact the poor did become poorer. Although that is a consequence, I think the good that evolves from encouraging home ownership outweighs these setbacks.
Good post kkent. Terrible idea. Read some writing / comments from David Dodge on why this wrong. He got a lot of flack for making them at the time because “housing has nothing to do with his job” but he was right. Why would you want to encourage risk taking behaviour such as extremely high consumer debt levels, and real estate speculation? And exactly as kkent said this makes houses less affordable, not more affordable.